We have all heard about Pay for Performance (P4P) and some of our companies have implemented a P4P program and are seeing positive results. But what is P4P and how does it work best? There are forms and incarnations of P4P that work better than others. Here is my take on it.
P4P is essentially rewarding highly productive workers with higher income. The top performers drive the business and provide the highest income potential for the company and therefore should receive higher cash rewards. P4P looks at compensation differently than traditional seniority or time/step based plans in that increases in income are generated by achieving – and sometimes surpassing – quantifiable contributions to the company. The program usually offers no guarantees for increases or incentives until certain performance measures are met. P4P is a great alternative for a company instead of a traditional compensation plan. The performance pay can come in the form of incentives (typically how they are paid) or by incremental increases to base pay.
P4P plans are a great way to build engagement among your staff and line the pockets of top performers with cold hard cash (and hopefully keep them from predatory recruiters who try to lure them away to better opportunities). But in order for this type of program to be a success there needs to be a few things in place. These are some of the basic steps to creation of a P4P plan.
Budget – Can your company afford the start up costs of a P4P program? The plan can be tailored to fit any company structure however some companies might have existing salary programs that include high base salaries. In these cases, there could be a higher budget requirement to both pay the salary and the incentive. Be sure to look at this before you work on developing a P4P plan.
Consistent Measurement – How does your company measure success? Be sure to come up with goals that are in line with the corporate strategy and vision of the company. Measures can and might vary from department to department but all goals should be tied to a greater corporate good. Some traditional measures are revenues per share, net income and operating profit. While these are good, there are more companies looking at earning before tax, depreciation and amortization (EBITDA) which gives a more succinct indication of how the company did financially as well as cost reductions and savings. Of course the ability of a company to stay liquid (statement of cash flows) is a good measure. Whatever you chose to measure, be sure it is important to the company.
Use Long Term & Short Term Incentives – Keep in mind that a good and appropriate mix of incentives that are both short (within a year) and long (more than a year) term will help add value and success to the plan. Long term incentives (LTI) are usually paid in stock or shares in the company. With the current stock market situation, be sure to look at LTIs objectively as they might not provide employees with drive to outperform. Short term incentives (STI) are best used for meeting goals on quarterly, semi-annually or annually. STIs could be tied to quarterly business objectives and then annual EBITDA, for example. The decision of which measure(s) to use should be based on what would work best for your company. There have been some big changes to how executive compensation plans are built so be sure to integrate the new rules and regulations into your LTIs for top executives.
LTI & STI Tip – be sure to cap your LTI and STI payout potential. If you don’t, you will inevitably have some shining stars that could break the bank. It is imperative to have a maximum payout so your top performers don’t go over their maximum. Or worse yet, upon review of the plan after implementation you see that some employees have gone over what was budgeted and then a cap is put in place. This could seriously reduce morale and invalidate the integrity of the plan in the employee’s eyes.
Communication of the Plan – The lynchpin out a successful P4P program is its communication to the staff. There might need to be a change in mindset among long term employees when implementing a new plan. The concise and clear communication of the new plan, how it will be paid and what measurements will be used is crucial. Consider your audience and put together an airtight communication plan that has buy-in from the top.
Review & Evaluate (and Realign, if necessary) – How did it go? This is the step where you look at how the first reporting period went and how the plan paid to employees. Perhaps the measures need to be tweaked or the incentive payouts need to be reviewed. Hopefully you found that the plan is working the way you anticipated it would. If so, hurray for you! Take time to carefully evaluate your plan and weigh the results against the intended outcome.
Putting together a P4P plan can be simple or complex based on the needs of your company. Organizations like WorldatWork, SHRM and IFEBP offer great ideas, webinars and information on the creation, development and implementation of these types of plans so be sure to get more information before charging in. Pay for Performance programs can give your company the edge it needs in attracting and retaining the highest performers.
Don’t forget to CELEBRATE!
I read yesterday that the Department of Labor (DOL) is launching a Wage and Hour application (app) for Smartphones. This app will allow employees to track their hours worked and when their paycheck does not accurately reflect their records, they can submit their complaint to the DOL. There is even a connection the DOL has to the American Bar Association that offers attorney referral services to employees whose cases the DOL chooses not to take on. Sounds good, right?
According to the DOL, there was a significant increase in 2010 of wage and hour lawsuits (close to 6,800 about 700 higher than 2009). While that number may seem low in the grand spectrum of employment, the DOL has added a few hundred more examiners to combat the forecasted increase in these types of claims. The DOL’s thought process is that this app will make it easier for effected employees to issue complaints and receive their proper pay. Employees who work for companies that may not follow all wage and hour regulations (whether intentionally or out of ignorance) will surely be benefitted. For those companies that follow the rules, this could be a problem. Wage and hour claims can take up valuable resources and cost companies large amounts of money – even if the company is compliant with the law!
From an employer standpoint, this new app should be concerning – if not alarming. As with any computer related application, the information that is input is only as relevant and factual as the person entering it wants it to be. Therefore, any unhappy or disgruntled worker could potentially wreak havoc for a company who follows the guidelines. Most Wage and Hour claims are related to improper classification of exempt employees and not paying non-exempt employees the right amount of overtime. Having a firm grasp on your company’s pay practices is the best remedy to future claims.
This is a great time to make sure your pay policies and compensation programs are in line with the law. Using the exemption tests to check the status of each position helps to alleviate wage and hour complaints. Also, communicating to all non-exempt staff that they must log all hours worked is a good idea. There is always an employee who might stay an extra 15 minutes to finish a project or who may come in early to help cover the office and not log this extra time (for whatever reason). One area that seems generate questions is off site training classes that may or may not include work hours. Check with your compensation team or consultant to find out the criteria paying employees correctly. If an employee happens to work unapproved overtime, they can be disciplined but they must be paid for that time. The important thing to remember is that they must log and be paid for all time worked.
If you follow the DOL rules and regulations, it does not guarantee that you will be safe from wage and hour allegations however you will have a solid standing and response if there is a case brought against your company. Another to remember is to not give any impression of retaliation against an employee who brings either a false or legitimate Wage and Hour claim. That could lead to a whole other set of problems.
The rule we should always remember is – Do what you can to prevent the DOL from knocking on your door.
Don’t forget to CELEBRATE!
Imagine if you will….You are a good employee and have worked in the same position for several years for the company. You have steadily increased your knowledge, your skills and your pay through merit increases. One day, a mass email is sent out by Recruiting asking for employee referrals for the same position you hold. You remember that your friend wants to work at your company and you contact them to let them know to apply. Your friend interviews and gets selected for the position – how great! In their excitement, your friend tells you their pay rate. And you sink in your chair. They are making only slightly less than you are right now which is much higher than the rate you started at. How could the company do this to me? Have I done something wrong? I have known my friend for years and they are smart but they don’t have the experience or knowledge I do. What is going on?
Pay compression. That is what’s going on.
Pay compression is not good when it occurs. It can cause problems with morale and sometimes even legal issues. Compression can happen when everyone least expects it. It can creep up and wreak havoc to even the best of companies. There can be many reasons for compression including rapid growth for the company and even the economy. The best remedy is to be vigilant about what you are paying existing employees and what you are offering to new hires. However if your incumbent’s pay rates start to meet your new hire pay rates for the same position there are solutions, but the solution should happen quickly and transparently in order to fix the problem.
The first thing to do is to figure out what happened – why is the newest member of your team making as much as, or even worse – more! – than, your fully trained staff performing the same role? There are times we hire a stellar candidate and pay them more to just get them in the role, when they are perhaps overqualified or expecting a salary that is not equitable compared to the incumbents. Sometimes hiring decisions are made that might need to be reevaluated. Take a moment to assess the situation fully. Focus on all potential positions that are effected and come up with a solution.
Next, transparently address the issue. Honestly explain what happened to all affected parties and share your solution. Explain what steps will be taken to quickly repair the current situation. This might require the company to “eat some crow” and accept responsibility. This is where the company might give a unilateral increase to all those employees who are below a certain level or use variable pay to compensate your long term performers. If the solution is solid and fair, the sting will hopefully only be temporary. Then it’s on to the last step.
Finally, FIX IT! Take a good, hard look at what happened. Check the market for the position. Maybe it is time to look at using a different pay philosophy for the affected area(s). There might be some pay policies that need updating or market analysis that needs to be done at this point. Put processes in place to prevent future compression outbreaks.
Once you are back on the straight and narrow, do what can be done to ensure compression doesn’t happen in the future. Sometimes an annual review of all employee pay rates for certain roles can help catch potential compression. The old saying, “An ounce of prevention is worth a pound of cure”, is spot on when it comes to compression problems in the workplace. Taking time to review your compensation program annually might nip this type of problem in the bud.
Don’t forget to CELEBRATE!